Oracle: Morgan Stanley, RBC Cut to Hold on Cloud Incursion

By Tiernan Ray

Shares of Oracle (ORCL) are down 86 cents, or 2.5%, at $33.70, after two negative notes this morning, with Morgan Stanley‘s Keith Weiss cutting his rating on the shares to Equal Weight from Overweight, and stripping his $36 price target, “given our lack of conviction around forward catalysts,” and RBC Capital Markets‘s Matthew Hedberg cutting his rating to Sector Perform from Outperform.

Lack of catalysts is not the only problem, according to Weiss’s note. Oracle’s “Fusion Apps” software offering is seeing weaker and weaker “momentum,” writes Weiss, while the company’s hardware products have seen their growth rate “fade more rapidly than we expected.”

Fusion is a mix of functionality put together from various existing Oracle products, and it can be set up in a company’s data center, he notes, or as a hosted, cloud computing service.

Interest is waning for Fusion among customers, he writes, at least in part because of Salesforce.com (CRM) and Workday (WDAY) and other cloud vendors cutting into Oracle’s market.

More Tepid View on Potential Fusion Impacts The results of our fourth survey of >150 Oracle customers since Fusion became generally available makes us more measured in our expectations for Oracle’s ability to accelerate top-line growth, beyond the incremental caution we expressed six months ago [...] Broader interest levels continue to wane and now only ~30% of customers are even planning to consider evaluating or deploying Fusion (beyond the 12% who have already adopted it). We also note that a significant percentage of customers are considering competing offerings, particularly from Salesforce.com and Workday. Our survey shows 59% of customers said they had no plans to evaluate Fusion or had already evaluated and decided not to adopt it. That figure continues to rise rapidly from prior surveys (52% in May 2013, 40% in November 2012 and 38% in May 2012). Actual Fusion adoption downticked modestly from our prior two surveys, though is still up from our inaugural one and we do not necessarily think this dynamic necessarily means customers have already shut off Fusion implementations, but is more a function of the volatility a few changes in response can make on a low figure. Overall, our concern remains the same. The number of “shots on goal” has dramatically declined, making it more difficult to achieve the 30-40% potential penetration we expected last November or even the revised 25-35% range we laid out in May. For example, while 47% of customers were evaluating or planning to evaluate Fusion in May 2012, now only 26% have similar plans.

Growth of hardware, meantime, has slowed significantly, he estimates:

For quite some time we have been more cautious than the Street about how quickly Oracle’s hardware business will return to growth, while arguing this debate is somewhat misplaced anyways given the relative insignificance of the legacy business to EPS. Given the nature of the company’s inconsistent disclosures around the hardware businesses, exact Exa-growth calculations are challenging. However, combining Oracle’s commentary with data from IDC, we are able to paint a clearer picture — one that suggests growth has significantly fallen off from the triple-digit levels achieved through most of CY12. In fact, we estimate that Engineered Systems growth over the past six quarters has decelerated from ~150% YoY to ~30% in the most recent quarter, with Exadata only likely growing in the 10-20% range. While these are still very respectable numbers versus any other scale hardware company, the rate of fall off suggests some growing pains for the business.

Somewhat less definitively, Hedberg also voices cloud concerns:

We believe cloud computing is disruptive to legacy application vendors and should continue to gain share while PaaS and IaaS vendors could pose a threat to the middleware business. Lower cost alternative data stores may pose a long-term threat to Oracle’s grip on data management. Valuation is currently in-line with three and five year averages. We remain reserved on the outlook for CapEx spending and overall IT spending in China. We believe the company could need to show greater consistency, growth in SaaS, and evidence that Sun is in fact additive to revenue growth and margins to see significant multiple expansion.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.